Can't Call Southwest a Discount Airline These Days

High fuel prices, the end of lucrative fuel hedges and a changing route network have led Southwest to push its prices up dramatically, faster than many other airlines. With last-minute fares of more than $1,000 round-trip in long-haul markets, some nonrefundable fares over $900 and average prices in some markets higher than competitors, it's hard to call Southwest a "discount" carrier anymore.

ENLARGE

A Southwest Airlines plane comes in for landing in Dallas in April.
European Pressphoto Agency

Has "discount" carrier Southwest become just another big airline? It is now the most expensive airline in the U.S. on a cost-per-mile basis. Scott McCartney discusses how it is bumping up fares.

Southwest's average ticket price has jumped 39% in the past five years, while the average ticket price for domestic trips for the industry was up 10%, according to the Department of Transportation.

That's led to more markets where Southwest is sometimes higher priced than rival airlines. Between Baltimore and Oakland, Calif., a route where Southwest carries 73% of all passengers, Southwest's average ticket was $232 in the fourth-quarter last year, up a hefty 63% from $142 in the same period of 2005, according to government data. The second-largest carrier on that route was Delta Air Lines Inc.,DAL0.70% which averaged $166 in the fourth quarter last year, or 28% less than Southwest.

Need to go from Boston to Los Angeles at the last minute? Southwest recently offered one-way, connecting flights for next-day travel at $523. US Airways Group Inc. offered connecting flights the same day at $320. AMR Corp.'s American, jetBlue Airways Corp.JBLU0.52% and Virgin America Inc. all had non-stops at $534.

Southwest says prices are higher than the airline would like—a consequence of high fuel prices. The company has remained profitable, unlike so many other airlines, and passenger traffic has been growing. But the airline recognizes there will be limits to how high it can go with fares.

The Middle Seat Terminal

"We don't like the fact that we have had to increase prices, but we absolutely would continue to hold out that we are America's leading low-fare airline," said Dave Ridley, Southwest's chief marketing officer.

One major reason Southwest prices can seem higher than competitors, he noted, is because Southwest doesn't charge fees to check baggage or penalties to change tickets. Check one bag for $25 each way and a Southwest ticket that is $50 higher than another airline may, in fact, cost the same.

"We're all-in, day in and day out," Mr. Ridley said. "We continue to maintain we are the best value in the air."

ENLARGE

There are, of course, still many markets where Southwest is indeed the lowest-priced carrier, and many where Southwest has forced rival airlines to drop their prices. Historically, there have always been instances where other airlines had cheaper prices than Southwest for particular flights. But travelers and fare analysts say that as Southwest has pushed its prices higher, that's happening more often.

"Southwest is becoming more of a hybrid, catering more to the business traveler and acting more like a 'big' airline," said Robert Harrell, a consultant who tracks airfares weekly. An upside of higher airfares: They help business travelers earn more points in Southwest's revamped frequent-flier program, which entices people to pay higher prices to get bonus points.

Craig Seidel of Palo Alto, Calif., flies Southwest frequently between San Jose and Burbank for work and has seen one-way ticket prices go from $69 Wal-Mart levels to seemingly Nordstrom levels of double or triple the price.

"It used to be so cheap it was almost like taking the bus. But now I seem to spend $400 on a round-trip ticket," Mr. Seidel said. "I feel more of a sticker shock on airline tickets than I do at the gas pump."

There have been structural changes in how Southwest prices tickets. Three years ago, Southwest doubled the number of fares it offers on any flight to 16 from eight. Shoppers don't see all those fares, but they are loaded into the airline's reservation system. As seats sell, the lowest price offered bumps up to a higher fare "bucket," as the industry calls the different price levels. The move puts Southwest's structure closer to other airlines, some of which employ two dozen fare buckets.

In many cases where Southwest has a higher price than competitors, it almost always had the lower price available for a time. But after tickets sold, its best offering moved to a more expensive fare bucket, Mr. Ridley said. With Southwest pricing, it almost always pays to shop early. It's rare when Southwest cuts the prices on seats at the last minute.

For a Phoenix-Los Angeles round-trip over the July Fourth weekend, for instance, US Airways, American and Delta all offered seats at $144 but Southwest's cheapest price for the same dates was $169. Mr. Ridley said Southwest offered the $144 price, but sold all the seats it wanted to at that level and so its lowest price became $169, while competitors still had seats at the lower fare.

And Southwest prices long trips with connections differently. While many airlines offer a discount if travelers are willing to endure the inconvenience of connecting flights instead of non-stop flights, Southwest still prices connecting trips more like two non-stops. Because Southwest doesn't operate massive hubs where most traffic is funneled, it often doesn't have as many connections to offer. With fewer seats, it can price higher.

In a connecting market like Albuquerque, N.M., to Providence, R.I., Southwest's average ticket was $246 in the fourth quarter, according to Bureau of Transportation Statistics data, while Delta averaged $204.

ENLARGE

The end of Southwest's fuel hedges made the biggest change in pricing.
Getty Images

Mr. Ridley said there are other reasons for Southwest's larger-than-average price surge in recent years. Southwest has been adding longer flights, pushing its average ticket price higher simply because it is flying people farther, he said. The average distance of a passenger trip on Southwest rose 14% over the past five years.

In addition, as Southwest has expanded into big-city hub airports like Philadelphia, Boston, New York and Minneapolis, it has forced competitors to reduce fares in many more markets, helping to drive the industry average lower. Moving into bigger airports has slowed Southwest's operation some and pushed operating costs higher.

The end of the fuel hedges made the biggest change in pricing, however. For many years Southwest's fuel costs were significantly lower than rival airlines because Chief Executive Gary Kelly decided when prices were low before the U.S. invasion of Iraq to prepurchase fuel and buy hedges against higher prices.

Ticket to Ride

In a spot check of 24 markets for travel over the Fourth of July weekend, Southwest had the lowest prices in only 11

From Phoenix to Los Angeles round-trip, US Airways, American and Delta all offered nonstop flights at $144; Southwest was offering its seats at the same time at $169

Between Newark Liberty International Airport and Houston round-trip, Continental had seats on nonstop flights for $412 while Southwest's cheapest price was $486

Between St. Louis and San Francisco, American's lowest price was $399 and Southwest's lowest price was $430

Mr. Ridley pointed to fares in markets Southwest doesn't serve as evidence that his airline is still the low-fare enforcer. Before Southwest began flights to Greenville-Spartanburg, S.C., in March, the one-way unrestricted coach fare to Orlando was $830. After Southwest entered, it dropped to $206. Philadelphia went from $978 one-way to $290.

Or look at a market like Atlanta-Nashville, Mr. Ridley said, which only Delta services. The average fare in the fourth quarter was $152 for that 215-mile hop, while the average price for trips of similar length in Southwest markets was significantly less, such as $110 average for Baltimore-Pittsburgh tickets in the fourth quarter, according to DOT data.

As for the "discount" airline label, Southwest has never used it or wanted it because it can conjure notions of poor service. "We see ourselves as the low-fare leader," Mr. Ridley said.

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